Conducting Business in the Land of the Dragon: What Every Businessperson Needs to Know About China
By Alan Refkin and Scott Cray
()
About this ebook
China is as tough a business environment as youll experience anywhere in the world, remaining one of the most complicated places to do business. Just ask all the company executives and entrepreneurs whove tried to do business there, lost money, and closed shop. They learned the hard way that success elsewhere doesnt always lead to riches in China.
Alan Refkin and Scott Cray, with Thornhill Capital, have spent years doing business in China, and they have a long-term track record of helping companies navigate the complicated business terrain. In this, their new guide, they share their intimate knowledge of how business is conducted in China. They explore the intricacies of how the Chinese negotiate, discuss ways to better protect yourself from the increased threat of cyberespionage and the theft of your intellectual property, show you how to litigate if necessary, take you through whats needed to successfully interact with government officials, and demonstrate how you can be successful and reap the financial rewards from conducting business in China.
Being successful in China is not an accident. What separates the thriving businessperson from those who abandon the country and their dreams for success is preparation. Get the information and tools you need to accomplish your goals, dominate, and win with Conducting Business in the Land of the Dragon.
Conducting Business in the Land of the Dragon is a keen twenty-first-century guide to China and makes excellent reading for both experienced Sinophiles and China novices. Everyone will learn from Alans fascinating experiences and understanding of China, its people, its culture, and its future. John Lucas, director, Weinberg & Company Youll never find a better guide to take you through the reality of conducting business in China. Period. Jose F. Sada, president of DS Capital PartnersAlan Refkin
Alan Refkin has written fourteen previous works of fiction and is the co-author of four business books on China, for which he received Editor’s Choice Awards for The Wild Wild East and Piercing the Great Wall of Corporate China. In addition to the Mauro Bruno detective series, he’s written the Matt Moretti-Han Li action-adventure thrillers and the Gunter Wayan private investigator novels. He and his wife Kerry live in southwest Florida, where he’s working on his next Mauro Bruno novel.
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The Archivist: A Thriller Rating: 0 out of 5 stars0 ratingsPiercing the Great Wall of Corporate China: How to Perform Forensic Due Diligence on Chinese Companies Rating: 0 out of 5 stars0 ratingsThe Collector: A Mauro Bruno Detective Series Thriller Rating: 0 out of 5 stars0 ratingsThe Cabal: A Matt Moretti and Han Li Thriller Rating: 0 out of 5 stars0 ratingsThe Defector: A Gunter Wayan Private Investigator Thriller Rating: 0 out of 5 stars0 ratingsThe Mistress: A Mauro Bruno Detective Series Thriller Rating: 0 out of 5 stars0 ratingsThe Arrangement: A Gunter Wayan Private Investigator Thriller Rating: 0 out of 5 stars0 ratingsDoing the China Tango: How to Dance Around Common Pitfalls in Chinese Business Relationships Rating: 0 out of 5 stars0 ratingsThe Patriarch Rating: 0 out of 5 stars0 ratingsThe Organization: Book One of the Gunter Wayan Private Investigator Series Rating: 0 out of 5 stars0 ratingsThe Abductions: Book Two of the Matthew Moretti and Han Li Series Rating: 0 out of 5 stars0 ratingsThe Artifact: A Mauro Bruno Detective Series Thriller Rating: 0 out of 5 stars0 ratingsThe Payback: A Matt Moretti and Han Li Thriller Rating: 0 out of 5 stars0 ratingsThe Frame Rating: 0 out of 5 stars0 ratingsThe Scion: Book 2 of the Mauro Bruno Detective Series Rating: 0 out of 5 stars0 ratingsThe Forgotten: A Matt Moretti and Han Li Thriller Rating: 0 out of 5 stars0 ratingsThe Chase: A Matt Moretti & Han Li Thriller Rating: 0 out of 5 stars0 ratingsThe Wild, Wild East: Lessons for Success in Business in Contemporary Capitalist China Rating: 0 out of 5 stars0 ratings
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Conducting Business in the Land of the Dragon - Alan Refkin
Copyright © 2013 Alan Refkin and Scott Cray.
All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.
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ISBN: 978-1-4917-1253-5 (sc)
ISBN: 978-1-4917-1255-9 (hc)
ISBN: 978-1-4917-1254-2 (e)
Library of Congress Control Number: 2013920199
iUniverse rev. date: 11/22/2013
CONTENTS
Preface
Acknowledgments
Introduction
Chapter 1 Why China?
Development of Industry
Development of Services
Technological Innovation
Consumption
Income Disparity
Urbanization
Environmental Protection
An Economic Goliath
A Fondness for Foreign Goods
The World’s Manufacturing Superpower
China Is Modernizing
Chapter 2 Taking Advantage of the Chinese Economy
Ready, Fire, Aim!
Know Your Market
Tailored Products and Messages
The Chinese Market, a Matrix of Microsegments
Attracting the Consumer
Foreign Companies Dramatically Expand
Logistical Challenges
E-Commerce
Chapter 3 Government Subsidies and the Home-Court Advantage
A Lack of Transparency
The Home-Court Advantage
Promises Broken
Subsidies and State-Owned Enterprises
Subsidies and Unemployment
Subsidies and Private-Sector Firms
Subsidies and the Job Crunch
Subsidies and Currency Manipulation
It’s Not a One-Way Street
Who’s in Charge?
Chapter 4: Working as a Foreigner in China
Outsiders and Insiders
Americans Are from Mars; Chinese Are from Venus
One Country, Many Languages
A Socialist-Capitalist-Communist Society
A Foreigner in China
Look before You Leap
Finding a Job
Requirements for Working in China
Obtaining Required Approvals
Work Experience
Legal Representative
Working with State Secrets
Chapter 5: Litigating in China
The Constitution
How Power Is Distributed in China
How Chinese Courts Are Structured
Judges
The Evolution of Lawyers in the Chinese Legal System
Differences between Litigation, Mediation, and Arbitration
Evidence Collection
Starting Your Litigation
Cost of Litigation
The Verdict
Enforcing a Judgment
Lawsuits in China Increase
Chapter 6: Protecting Your Intellectual Property
The Four Types of Intellectual Property in China
Enforcement
Chinese Agencies Charged with Administrative Enforcement
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ)
State Administration for Industry & Commerce (SAIC)
State Intellectual Property Office (SIPO)
National Copyright Administration (NCA)
General Administration of Customs (GAC)
Public Security Bureau (police)/Procuratorate (prosecutors)
Regional Intellectual Property Rights (IPR) Bureaus
Judicial System
US Government Agencies Charged with Enforcement
US Immigration and Customs Enforcement’s (ICE) National IPR Coordination Center
US Department of Justice’s Computer Crime and Intellectual Property Section (CCIPS)
www.stopfakes.gov
US Embassy in Beijing, China
US Customs and Border Protection E-Recordation Website
US Government Assistance
US Lawsuits against Chinese Companies
Chinese Lawsuits against US Companies
China Increases Its Patent Filings
Protecting Your Patents
Summary
Chapter 7: Chinese Employees and Employee Contracts
A Shortage of Skilled Workers
Increasing Employee Retention
Hiring Employees
Termination of Employees
Termination without Notice
Termination with Thirty-Day Notice
Termination with Severance Compensation
Insurance
Pensions
Medical Insurance
Work-Related Injury Insurance
Unemployment Insurance
Maternity Insurance
Sick Days
Bereavement Leave
Marriage Leave
Housing Fund
Workweek and Overtime
Holidays
Vacations and Leave Days
Employee Contracts
Chapter 8: Corruption, Bribery, and Other Tools of the Trade
Government and Commercial Corruption
Corruption Costs
Guanxi
Can the Chinese Government End Corruption?
Examples of Corruption
Living in Denial
Does Corruption Help the Chinese Economy?
The US Foreign Corrupt Practices Act
Chapter 9: Rising from the Ashes: China Tries to Solve Its Environmental Issues
Environmental Concerns
Air Pollution: The Problem
Air Pollution: The Solution
Water Pollution: The Problem
Water Pollution: The Solution
Desertification: The Problem
Desertification: The Solution
Biodiversity: The Problem
Biodiversity: The Solution
Agricultural Pollution: The Problem
Agricultural Pollution: The Solution
Waste: The Problem
Waste: The Solution
Alternative and Renewable Energy
A Rocky Road Ahead
Chapter 10: How Banks Operate and Implement Government Policy
Foreign Banks Make Money, but Are Not Relevant in China
China’s Central Bank
Policy Banks
China Development Bank, the Muscle Behind China’s Global Expansion
Problems Persist
Foreign Banks Are Still Foreign in China
Foreign Credit Cards
The Government Exercises Control
Chapter 11: China’s Growing Influence in Other Parts of the World
Why Is Africa Important to China?
Why Is Australia Important to China?
Why Is Latin America Important to China?
China Wishes to Gain Access to Latin America’s Natural Resources
Attracting Political Support from Latin American Countries
Why Is China Important to Latin America?
Latin America’s Hopes for Future Access to Chinese Markets
Latin America’s Hopes for Future Investment by China
The Benefit of Chinese Entities and Infrastructure in Latin America
China as a Counterweight to US and Other Western Institutions
China as a Role Model for Economic Development
Marginalizing Taiwan
Chapter 12: Chinese Cyberespionage Is Common, Pervasive, and a Fact of Life
Vulnerabilities of the Internet
The Internet Addressing System
The Routing among Internet Service Providers
Most Information Is Sent in the Clear, or Unencrypted
The Ability to Propagate Intentionally Malicious Traffic
The Internet Is One Network, with a Decentralized Design
All Nations Conduct Cyberespionage
In China, Image and Harmony Are Everything
Welcome to China—Give Us Your Data
Buy Our Equipment—Give Us Your Data
Just Give Us Your Data
The Attack Process
Foreign Travelers Are Vulnerable
Mitigating the Risk
Chapter 13: Take Control, Negotiate, and Win
Characteristics of American Negotiators
Businesslike
View Negotiations as Joint Problem Solving
Negotiate according to Their Own Set of Values
Preference for Directness and Bluntness
Ambivalent
Legalistic
Judgmental
Use of Inducements
Impatient
Negotiating Style Affected by Regional Differences
Respect Achievements, Rather Than Individuals’ Pedigrees
Have a Bottom Line
Understand the Culture First
Agrarianism
Morality
Language
Wariness of Foreigners
Characteristics of Chinese Negotiators
Relationship-Driven
Motivated to Save Face
Belief in a Defined Hierarchy
Belief in a Defined Consensus
Interpersonal Harmony Is Paramount
Frugality
Reciprocity
The Negotiating Process
Using False Authority
Exerting Time Pressure
Psychological Pressure
Left-Field Issues
Using Competitors
Changing Negotiators and Locations
Pushing to Find the Bottom Line
Reopening Closed Issues
Chapter 14: Putting It All Together and Prospering in Modern-Day China
Endnotes
Bibliography
About the Authors
Praise for Conducting Business in the Land of the Dragon
Drawing upon their years of experience in country,
Alan Refkin and Scott Cray have crafted a practical guide of how to succeed as a Western company in the promising yet pitfall-ridden Chinese market. Comprehensively referenced and meticulously constructed, they also address critical yet arcane issues, including intellectual property and cyber security, with the same ease and common sense that they bring to more traditional topics. The result is more than a primer. It’s a plan for successful engagement for Western companies wishing to better understand and master business development in China.
Rob Durst, CEO, Silver Bay Technologies
Working in the Latin American market, I’ve constantly been around foreign investors who fail to understand the challenges they must work through, and connections they have to establish, in order to be successful in an unfamiliar country or market. When I went with Alan Refkin to China a few years back, I couldn’t help but be utterly impressed by the way he made overcoming the aforementioned challenges look easy, despite the culture and language barriers. The speed at which he formed solid relationships with Chinese business owners, officials, lawyers, and accounting firms amazed me.
If you have to buy one book which teaches you about how to conduct business in China, make this that book. You’ll never find a better guide to take you through the reality of conducting business in China. Period.
Jose F Sada, president of DS Capital Partners
Having done business in China, but now focusing on emerging Eastern European markets, I found much of the information contained in Conducting Business in the Land of the Dragon to be not only highly informative for someone conducting business in China, but it also had applicability to other emerging markets. This is a well-written book for anyone who wants to go under the covers and see how business is really conducted.
Tom Suppanz, director of investment banking, NESEC
Doing the China Tango is a keen twenty-first-century guide to China and makes excellent reading for both experienced Sinophiles and China novices. Offering insights in a wide range of issues, everyone will learn from Alan’s fascinating experiences and understanding of China, its people, its culture, and its future.
John Lucas, director, Weinberg & Company
Praise for Doing the China Tango
I’ve been investing in, writing about, studying, and observing the world of small stocks and their associated successes, foibles, and failures for nearly twenty-five years.
I’ve been witness to a $3,800 investment becoming $4.2 million over a twelve-year time frame, and the demise of one of the great behemoths of all time—the pride of Rochester, New York. I’m referring to Kodak, the master of all things celluloid, whose complete failure to embrace the digital imaging revolution led to its total undoing.
So, as a serial small-cap investor, I thought I’d found nirvana when I began studying the financial performance of the small stocks of China, which had navigated their way to US investors by listing on our stock exchanges and accessing our capital-rich markets. The valuations, profits, and growth rates had me swooning like a teenage girl in the front row of a Justin Bieber concert. With a little homework, patience, and luck, I was on my way to early retirement, riding the wave of the largest emerging consumer class in the history of the world.
As I was trained to do in my early days, I dug into the SEC filings, blindly believing the great accounting institutions of the twenty-first century had my back.
Alas, a substantial loss of my personal capital, along with a significant beating to my ego, was the result of not realizing early on that there is an entirely different and unfamiliar set of rules for doing business in China.
Without the proper guidance, you will find yourself stripped bare of your money and your pride in short order.
Had I met Alan Refkin earlier in the process, I might have been better prepared to swim in China’s great white-infested waters.
After working with and learning from Alan, I came to recognize that it’s possible to do business in China, but only with the intrepid guidance of a grizzled veteran of the China business world.
Standards of integrity will evolve in China to a higher level over time. However, at present, China cannot be ignored; 1.3 billion people make for a very large global footprint. Very few of those citizens have much in the way of Western-style possessions, and the new generation of Chinese all want the same stuff we have. That’s a lot of opportunity.
Consider Doing the China Tango your personal survival guide for doing business in China. Don’t read it. Study it, and use what you have learned.
Had the aggressive investment bankers of the last ten years studied Doing the China Tango, a great deal of emotional and financial pain might easily have been avoided.
Larry Isen, editor and publisher, EmergingChinaStocks.com
Doing the China Tango quickly and succinctly explains what China’s business culture is all about. It should be required reading for anyone who is doing, or plans to do, business in China.
Philip Abbenhaus, director, Asian Equity Research Institute
I knew Alan in his early beginnings in China’s business environment. I believe Doing the China Tango reflects the disappointment, and the success, that a foreign investor faces in doing business in China.
This book targets the reality of conducting business in China and takes into account the country’s culture, social outlook, mind-set, legal environment, accounting methods, negotiation efforts, follow-up, and finally… success. In my opinion, it’s an excellent guide for anyone who wants to be aware of what’s needed to be successful in working with the business and government in China.
Jose F. Sada, president, DS Capital Partners
Alan Refkin: I dedicate this book to my beautiful and talented wife, Kerry, whose warmth and kindness envelop all those who know her. Also to J. J. Keil, Cindy and Dr. John Cancelliere, and Aprille and Dr. Charles Pappas.
Scott Cray: I dedicate this book first to the Lord, who directs my steps and without whom, none of my Chinese experiences would have ever been possible. Also to my lovely bride, Peke Lina, for always encouraging me. Last, but certainly not least, to all of the special Chinese people who have touched our lives and enriched our life experiences.
vectorstock_950533%20(2).jpgChinese Provinces and Cities
Preface
In Conducting Business in the Land of the Dragon, we delve into the evolving fabric of Chinese business and share an intimate knowledge of how business is conducted in China. We’ll guide you through the intricacies of how Chinese negotiate, discuss how to better protect yourself from the increased threat of cyberespionage and the theft of your intellectual property, show you how to litigate if necessary, take you through what’s needed to successfully interact with government officials, and show you how you can be successful and reap the financial rewards from conducting business in China. Most fail in China because they don’t have the knowledge to succeed. We want to change that. For more than a decade, we’ve assisted scores of companies that wanted to take advantage of the enormous growth enveloping China. This book encapsulates that decade of advice and will help provide you with the knowledge necessary to be successful in the land of the dragon.
China is as tough a business environment as you’ll experience anywhere in the world. Ask any of the companies that have lost hundreds of millions of dollars there or have closed up shop and gone home. They believed they had it together and that their team of legal, accounting, and business experts, who had been successful in other areas of the world, would also bring this same success to China. That’s not an assumption anyone should make. China is unique. Its business culture has been isolationist for thousands of years, and only in the last thirty-five years has the government permitted businesses to freely interact with the rest of the international community. As a result, what we know about China is all recent.
The temptation on the part of many businesspeople, therefore, is to ignore China and move on to a business environment that’s more Westernized and easier to understand. That may work for some, but China is the world’s number-two economy and, by most predictions, slated to be the world’s largest within the next two decades. China can’t be ignored. Most companies can’t, or don’t want to, walk away from the world’s future number-one market. But that’s exactly what some are doing because they don’t understand how to conduct business in China and accomplish their goals. Conducting Business in the Land of the Dragon will give you the in-depth knowledge and understanding that will make you better able to adapt to the current business environment, accomplish your goals, dominate, and win.
Alan Refkin and Scott Cray
Acknowledgments
We would like to thank David Dodge for his help and advice in understanding Chinese financial transactions. Dave is a world-class expert on Chinese forensic due diligence, and we frequently tapped into that expertise in compiling portions of this book. We’ve worked with Dave for over a decade, and he’s without question the most qualified person we know on the subject of US and Chinese accounting practices.
We’d also like to thank Vincent Zheng for his advice and perspective on all things Chinese. We’ve worked with Vincent for so long that he seems like a member of our family. During this time, he’s been our oracle and provided us with valuable counsel in analyzing corporate trends within China.
We’d like to thank Zhang Jingjie (Maria), whose research has enabled us to verify facts and provide more detail in our writings than would otherwise be possible. Many times her research entailed reading through stacks of Chinese documents and translating into English those that we required. This took a great deal of time and patience, and for that we’re both very grateful.
Dr. Kevin Hunter has been extraordinarily generous with his time in providing us with advice on all things technical. You’ll never find a more patient and humbler person than Kevin, nor in our opinion, someone who has a better grasp of all things technical. His counsel is greatly appreciated.
Our editorial consultant manager at iUniverse, Sarah Disbrow, has been a joy to work with. Her advice, counsel, and insights are greatly appreciated.
We’d also like to thank others who have unselfishly given us the benefit of their counsel. These include Jose Sada, Daniel J. McClory, Clay Parker, Doug Ballinger, Mark Iwinski, Mike Calbot, Lawrence Wan, Hao Yang, Yanfeng Chang, Cao Yan, Steve Zhu, and Tammy Fluech.
Lastly, and most importantly, we’d like to thank our wives. Writing takes a great deal of time. Most of this time is spent in an office typing on our computers, with books and other reference data piled high on our desks and on the floor. Our wives have been extremely patient and supportive during this social blackout.
They provided us with encouragement and more than a few cups of coffee to keep us going. For that, and much more, you have our love, gratitude, and admiration.
Introduction
Scarcely a day goes by when China is not in the news. Several decades ago, that wasn’t the case. China was considered backward, not business-friendly, and even worse, communist. That’s changed in the ensuing decades to the point where most Fortune 500 companies have offices in China and thousands of smaller companies have followed suit. Why China? As we’ll discuss, China’s economic growth is meteoric, and it’s the economic high-speed train that most companies want to climb aboard. They want to reap the financial rewards of conducting business with the world’s number-two economy.
But there are also many companies that have not purchased a ticket to board this train. They’re afraid. They’ve read in the news stories about the country’s pattern of stealing foreign intellectual property, cyberespionage, environmental issues, nonenforcement of laws, and similar disparities that we’ll discuss in detail. They know little about the land of the dragon, and as a result, they decide to remain domestic or focus in other areas of the world that don’t seem to have the problems they’ve heard about in China.
Conducting Business in the Land of the Dragon was written as a detailed guide for businesspeople who want to succeed in China. We wrote it because we wanted to provide you with the lessons we’ve learned in the almost eleven years we’ve conducted business there. During that time, we’ve had more than our fair share of business dealings that went wrong, those that succeeded beyond expectation, and those that went exactly as we envisioned.
What we lacked when we first went to China was a book such as this. If we’d had one, conducting business in China would have been easier, and we wouldn’t have so many scars to show from our learning experiences. Not that there weren’t business books on China at that time. There were. But few of these books went beyond what we considered to be the superficial, and even fewer were written by those who went through the school of hard knocks and provided their personal insights. This is the book we wished we had when we first came to China.
We divided Conducting Business in the Land of the Dragon into fourteen bodies of knowledge, or chapters, that we feel are essential for anyone conducting business in China. We selected these subject areas because, from our experience, these are the bodies of information you’ll need in order to succeed. That’s not to say that businesspeople who are unknowledgeable in one or more of these areas will fail. On the contrary, we’re perfect examples of those who’ve succeeded without this initial knowledge. However, for us, conducting business in China wasn’t initially a quick or painless process. Eventually, as we obtained these bodies of knowledge, our successes increased. We hope to spare you this learning curve by providing you with all the knowledge you’ll need to conduct business in the land of the dragon.
Chapter 1
Why China?
Why China? Three decades ago that question would have required a great deal of thought. China had yet to prove itself economically, was only beginning to gain political acceptance in the international community, and had just adopted capitalism. The world didn’t know what to make of China.
And China didn’t know what to make of the world. Its corporations were largely unfamiliar with the conduct of international business. Its political leadership was unacquainted with the nuances of international diplomacy. Its domestic leaders were unsure of how to interact with foreigners and structure transactions for those who wished to invest in their emerging economy.
China’s problems weren’t unique. All developed economies at one time or another addressed and overcame similar issues to become the established socioeconomic societies they are today. Like countries such as the United States, China must undergo three phases in its economic development in order to complete its transition to a mature economy. According to ChinaGlobalTrade.com, a program of the Kearny Alliance, these are the three phases:1
• development of industry
• development of services
• technological innovation
Development of Industry
In a country’s early stage of economic development, labor flows from the largely agrarian society into industry. The country’s growth consequently begins to accelerate as a result of its transition from less-productive agricultural labor to more-productive manufacturing labor. This is what occurred in the United States in the 1800s, and it’s what’s occurred in China since 1978. The productivity gains in this type of transition are huge, especially in the case of China, which has a plentiful agricultural workforce that has been increasingly migrating to urban areas in search of higher-paying jobs. The vast size of China’s agricultural workforce has allowed China to obtain the urban labor necessary to attain its high sustained rate of growth for the past three decades. For example, while China has averaged a 7 to 9 percent rate of growth for the past thirty